Thursday, July 31, 2008

6. What is Right with Kansas?


“As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market.”

Adam Smith, The Wealth of Nations


The state of North Dakota produces nearly half the wheat grown in the United States. Despite having a climate that provides only a limited amount of rainfall, a short growing season, and a harsh arctic winter, North Dakota is one of America’s great agricultural assets.


While North Dakota is an American garden, if it existed under a different political system, it would be a remote steppe, thinly populated by nomadic shepherds and herdsmen. North Dakota is one of the world’s great breadbaskets because it is a part of that capitalistic paradise called the United States of America.


Having been born in North Dakota and raised in nearby Montana, I have nothing but respect for the hardy wheat farmers of North Dakota. Much of the state’s agricultural success must be credited to their talent, hard work, and resourcefulness. Yet, if their state (along with its harsh climate) was located in central Asia, these great bread makers of the world would be sleeping in tents and chasing sheep and goats on horseback. They are the world’s greatest wheat farmers because they live in the land of free trade.


The North Dakota success story begins with the American constitutional convention. At the end of the American Revolution, the thirteen colonies became thirteen little nations, united only for a common defense from threatening European nations. Each state (that is, each governing nation) had powerful claims of sovereignty over its territory and the unsettled territory beyond the Appalachian Mountains.


Unsatisfied by the existing arrangement, the states replaced their weak union with a constitution that would reunite them together under a federal system of government. An unheralded part of this new arrangement was a clause that prohibited any state from interfering with commerce between the states. Known as the “Interstate Commerce Clause,” this part of our constitution was effectively the first NAFTA (North American Free Trade Agreement), denying the individual states the ability to protect their local businesses by issuing tariffs against competition from other states.


The Interstate Commerce Clause is the primary reason why America became the “land of opportunity” and the greatest commercial success the world has ever known. How the Interstate Commerce Clause worked its magic can be illustrated by the success of North Dakota wheat (as well as Kansas soybeans, hence the title of this post).


If North Dakota was a more sovereign state, not limited by the Interstate Commerce Clause, its power-seeking politicians would do what all politicians do – they would increase their personal power by performing favors for the people who keep them in power. In particular, they would pass laws that would protect their local apple growers, their steel foundries, and the state’s small but significant rutabaga producers. All of these protective measures, of course, would save inefficient local businesses, but at the cost of reducing the amount of acreage used to do what North Dakota does best – grow wheat.


Not to be outdone in their villainy, the politicians of the other states would pass measures to protect their local wheat farmers, reducing the market for North Dakota’s best product. The result of politicians in the various states being politicians is that North Dakota wheat farmers would have less income from wheat and a greater cost of living because they would have to buy their rutabagas, lettuce, and fruit from cold places like Grand Forks instead of warm places like Fresno and Bakersfield. Their farm machinery would need to be constructed from the steel foundries of Fargo and Bismarck. Politicians doing what politicians do would reduce the hard working citizens of North Dakota to a state of grinding poverty.


However, because we have a free trade arrangement among all of the political subdivisions within our economy of 300 million consumers, the hard working farmers of North Dakota have the advantage of an immense wheat consuming market. In addition, they also have the advantage of being able to buy farm equipment produced “back east” where farm equipment is best produced. And, most of all, they belong to a society of consumers that are free to buy their fruit from California, their cottons from Mississippi, and their engineering from MIT.


The great middle classes of North Dakota, Kansas, and the other states of America are the products of individual human ingenuity unleashed by the first great free trade agreement, the Interstate Commerce Clause.

Monday, July 28, 2008

5. Everyday Magic

Why do free market economies always outperform command (i.e. socialist) economies? The answer is a simple one; free market economies have the advantage of everyday magic. While small amounts of wealth can be produced from human labor and ingenuity alone, the high standard of living in modern economies is the product of a magic where wealth is created seemingly from nothing at all.

Only in a market can a hungry man with a few dollars in his pocket satiate his hunger with a professionally prepared meal. The market allows a non-metallurgist to use metal tools and a non-chemist to have access to complex plastics. Markets provide us with the experience of products from around the world and allow us to have tools, homes, and vehicles that we could not possibly create with our own labor and ingenuity. It is the activity of the market, what we refer to as “trade,” that provides us with the “comparative advantage” of many other people’s labor and ingenuity.

This comparative advantage is the magic that allows us to find wealth where it was never directly produced. Two people who have each labored for one hour can together generate four hours of wealth by concentrating their efforts where they each have a relative advantage and then trading their outputs to create a wealth that neither could have produced alone. As the number of traders increases, the magical power of trading increases exponentially. Like magic, wealth is produced by the simple act of trading as if each trade were blessed with the magic incantation “abracadabra.”

True, command economies offer products from around the world and meals that can be purchased with a fraction of a day’s labor, but the reason why they do is because they also trade in a market. The magical wealth of trade is productive in a command economy for the same reasons that it is in a free market economy. Magic is still magic even though, in a command economy, there is far less trading magic occurring and therefore there is an exponentially smaller amount of wealth being created. Command economies have limited magic.

So, what would be a typical man’s wealth if the magic of trading was completely forbidden rather than just inhibited as it is in command economies? He would be limited to the direct product of his own labor and ingenuity, which, assuming he is not a combination chef, metallurgist, chemist, mathematician, engineer and mechanic, would be perhaps a rough stone pounding device, a flint cutting rock, and whatever hides he could find to gird his loins. In Karl Marx’s utopian dream, man would be living in the Stone Age.

"A thriving and lucrative branch of industry promotes the creation and accumulation of new capital; whereas, under the pressure of taxation, it ceases to be lucrative; capital diminishes gradually instead of increasing; wealth and production decline in consequence, and prosperity vanishes...", Murray Rothbard

Thursday, July 24, 2008

4. The New Iron Curtain

"From Stettin in the Baltic to Trieste in the Adriatic an iron curtain has descended across the Continent."
Winston Churchill, speech at Westminster College, in Fulton, Missouri, March 5, 1946

Today, July 24, 2008, Barack Obama is scheduled to make a speech in Berlin, Germany as part of his campaign to win the American Presidency. It is most fitting that the speech is to be given in Berlin where a brick wall once stood to keep people from the socialist East from seeing the progress and material success of the western market economies.

Obama will, of course, be well received, as American politicians from the Democratic Party usually are. Whether the Democratic candidate is Obama, Hillary Clinton, or John Kerry, he is the preference for Europeans, regardless of who the Republican candidate might be. Why do the Europeans show such a strong fondness for the Democratic Party and its platform over that of the Republicans? Why do they tell us that we need a Democratic administration to “heal our country’s lack of prestige” that occurred under a Republican administration?

Germany, France, and the other countries of Western Europe have adopted socialist governments by evolution and now show little real difference from the societies that once existed on east side of the Berlin Wall. Like the old communist states of the East, the governments of Western Europe have adopted cradle-to-the-grave care for their citizens at the horrendous cost of their people’s liberty. And, like their eastern predecessors, the current states of Western Europe are well on their way to economical, cultural, and demographical failure.

Regardless of geographical position, sharing productive people’s wealth with the unproductive leads to a lack of productivity, stagnation of innovation, high unemployment, and immigration of “guest workers.” Europe is dying under the weight of the same ideology that destroyed the communist states of the east; Europe is dying of a cancer where an out-of-control mass of unproductive cells feeds off the productive cells that are needed to keep it alive and healthy.

The old communist governments that once existed on the east side of the iron curtain worked hard to hide the failures of their way of life from their own citizens. The Berlin Wall prevented the immigration of the East’s brightest and most skilled. It was also intended to prevent the people of the East from traveling to and witnessing the success of market economies. Travelers to the West from Russia, Poland, and all of the other states of the East were screened and sheltered to prevent the success of the West from being told to the people of the East. As long as the people in the East thought that everyone in the world waited in long lines for a roll of toilet paper, they would remain docile and accepting of the economic plight that was their fate.

Now Western Europe needs to follow the lead of its eastern predecessors and prevent its people from seeing what a market economy can succeed at while their “share the poverty” plans continue to fail. As we learned with the fall of the Soviet empire, however, the state’s imprisoning of its own citizens is not a reliable means of long-term hiding the material success that is occurring elsewhere. Rather than inhibiting their people from traveling, it is a much more lasting solution to simply stamp out free market economies wherever they raise their embarrassingly successful heads.

A Democratic administration, particularly one that promises to raise taxes and take money out of the market place, is the best way to restrain the progress and growth that has characterized America’s economy since the beginning of the Reagan administration. The Europeans love the Democratic Party because it shares their faith in “institutionalized envy” and assures them that productive people will someday have no more place to hide – not even in the “land of opportunity.”

Friday, July 18, 2008

3. Entrepreneurship Trumps Marx

The last thirty years of world history should be evidence enough to the open-minded that socialism necessarily leads to economic failure. Not only did the Soviet empire collapse in economic disgrace, but those countries that have continued to deny a market economy are known to be poverty-stricken wrecks.

For those with a more scholarly aptitude, there is more evidence that the state’s ownership of the means of production only leads to failure and resource misallocation. The various agrarian-socialist experiments, such as New Harmony and Brook Farm, have all ended in absolute failure, and the first colonies in American (Jamestown and Plymouth) were economic failures until they allowed the private ownership of the means of production (farm land).

To see why socialism must always fail economically, we need to look no further than the theory that serves as its ultimate foundation. Socialism, whether it is of the Marxist revolutionary model, the Fabian Society’s evolutionary model, or any of the other share-the-wealth schemes, rests upon the very idea that the value of any commodity is based solely upon the amount of labor that is involved in its production. This idea is known as the “labor theory of value,” first expressed by Karl Marx, but since adopted by those that insist upon “economic justice.”

The labor theory of value is contradicted by the practical experience we have of commodity markets where prices and values go up and down while the amount of labor involved stays the same. It is also contradicted by our experience with sales in retail stores and the book values of our cars that decline even when we leave them at rest. Value, and the price that accurately measures it, is really a product of demand, the desire that potential purchasers have for it, regardless of the labor involved. The labor theory of value is simply a very naïve idea upon which the very naïve system of socialist thought is based.

If we look deeper at the labor theory of value we can see the political history of the twentieth century unfurl before our eyes. We can see Mikhail Gorbachev surrendering in defeat to a triumphant Ronald Reagan, and we can see the massive shortages and starvations that have plagued socialist nations wherever they have existed. The labor theory of value does not measure human needs and therefore neglects the most important part of value – value is what satisfies human need.

The labor theory of value claims that labor is the only thing that determines a commodity’s value and that the capitalist simply exploits labor to produce this value. Neglected is this theory is the value of natural resources, varying human talent, and the entrepreneurship that provides the critical function of finding human needs and the means of satisfying those needs.

Among the things that are neglected in the labor theory of value is the ability of the astute capitalist who allocates resources in such a manner as to meet human demand. The difference between the economic disaster that occurred in Soviet Russia and the economic juggernaut of the West is primarily a result of the West’s ability to recognize true value. While the Soviets fumbled under a theory that placed no value on the entrepreneur’s ability to discover and satisfy human needs, the entrepreneurial driven market economies of the West let human needs determine value. The West succeeded because labor, natural resources, and the genius of successful decision-makers were drawn to the real source of value – human need.

Wednesday, July 2, 2008

Trade and Tyranny

Stop trying to control.
Let go of fixed plans and concepts,
and the world will govern itself.
Tao Te Ching, Chapter 57

Cooperation and coercion are the two methods that facilitate the combining of human effort into a single venture. Cooperation is a product of the free will of each party to the work; coercion is where some of the parties are forced to obey the will of some of the other parties. Cooperation is accomplished while preserving the liberty of all; coercion requires the enslavement of at least some to the tyranny of the others.

Tyranny, the coercion of some men by the powers of others, is most apparent when it occurs in a dictatorship. The abusive power of one strong man who lords a military force over his subordinates is the stereotypical idea we have of a tyranny. Less obvious, but just as tyrannical, is the coercion that a majority has over a minority in a democracy. True, in a democracy, the coerced have the safeguard of being able to vote against their oppressors, but, in the case where an oppressed minority is hopelessly outmanned (such as the minority of the most productive workers in a society that believes in the redistribution of wealth), the obedience of the minority to a power that threatens violence or imprisonment can be just as real in a democracy as in a dictatorship.

Dictatorships are coercive, monarchies and aristocracies are coercive, and democracies can be coercive. The question that we must then all ask ourselves is:

What form of government is not coercive?

And the answer to this question is simple “they are all inherently coercive.” Every form of government, in order to work as a government, must coerce its citizens. Whether through the enforcement of the laws that protect its citizens from violent crimes or through the indenturing of its people to build monuments to its leaders, the government must function through coercion in order to be a government.

So, if all governments work by coercion, what form of government is best?

The government that governs best is the government that governs least.

And, what form of government fosters the greatest amount of cooperation among its citizens?

Cooperation among mankind thrives best where the government coerces the least.